UPDATE 2-German banks will have to book Greek writedowns in Q2

* German audit watchdog says writedowns needed in Q2 reports

* German banks to book writedowns of 30 to 50 percent

* IDW: bank levy for Greece only way to avoid writedowns

* UK audit watchdog also eyeing banks' sovereign debt disclosures (Adds UK auditor body's comment, background)

FRANKFURT/LONDON, July 19 (Reuters) - German banks and insurers face billions of euros in writedowns as auditors are not ruling out the possibility of a Greek default.

Euro zone leaders meet on Thursday in a bid to thrash out a second rescue package for Greece which could involve some form of losses for government debt holders.

Germany's auditors' body IDW said on Tuesday that German financial institutions will have to mark down their Greek sovereign debt exposures in their second-quarter results.

"From today's perspective we see a need for a writedown", IDW's chief Klaus-Peter Naumann told Reuters, adding the move will affect all bonds in the banking book.

Initially not expecting a selective default, auditors changed their mind after German Chancellor Angela Merkel said over the weekend that she did not rule out a restructuring of Greek debt, Naumann said.

"A solution for Greece without participation of private creditors is difficult to imagine", he said.

Realistically, banks will have to book writedowns of 30 to 50 percent, Naumann added.

IDW said that German banks including state bank KfW hold a total of 23 billion euros ($32.66 billion) in Greek sovereign debt while German insurers hold 3 billion euros.

According to data released last week by the European Banking Authority, Germany's second biggest bank Commerzbank had 3 billion euros in Greek bonds at the end of 2010 and Deutsche Bank (DBKGn.DE) held 1.5 billion euros.

Germany's biggest landesbank LBBW held 769 million euros in Greek sovereign debt and cooperative DZ Bank had 731 million euros.

Britain's auditing watchdog also said on Tuesday he is watching UK banks carefully to make sure they give investors the full picture on their exposure to the sovereign debt crisis.

"In reporting to shareholders, companies must follow the accounting standards and make full disclosure in the notes to the accounts of their approach," Stephen Haddrill, chief executive of the Financial Reporting Council said in an emailed response to a question from Reuters.

"We will be paying close attention to how banks report through the work of the Financial Reporting Review Panel and the Audit Inspection Unit," Haddrill said.

Last week's EBA data showed that in Britain, Royal Bank of Scotland held 1.16 billion euros in Greek debt, HSBC 1.18 billion euros, and Barclays 93 million euros.

LEVY

Italian bank UniCredit said this month that various options could be acceptable for bank involvement in a Greek bailout plan as long as they did not trigger an impairment charge for banks. EBA data showed UniCredit has a net Greek debt holdings worth 637 million euros.

IDW's Naumann said a levy on financial institutions to finance a Greek aid package would be a way to avoid writedowns if the tax were to lead to a solution for Greece without a selective default or outright default.

A confidential paper drafted ahead of a European summit showed that a tax on euro zone banks in combination with cheaper, longer-dated official loans are seen as the least risky way to provide extra funding for debt-stricken Greece.

However, The German banking association rejected the idea of a bank levy to finance a Greek aid package.

Last week Commerzbank's chief executive Martin Blessing called for a 30 percent haircut on Greek debt followed by a rollover into euro zone-guaranteed 30-year bonds.

Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB) whose rules are mandatory for reporting in the 27-nation EU, has urged the bloc to adopt its new rule for reporting assets which would "give a little bit more leeway in terms of Greek government bonds".

Under the current rule bonds held as available for sale must be written down in line with market rates but the new rule allows for a less harsh valuation of bonds at cost subject to impairment, giving banks some room to make judgements.

EU financial services chief Michel Barnier responded that the new rule is not the solution to the euro zone crisis. (Reporting by Alexander Huebner and Arno Schuetze in Frankfurt and Huw Jones in London; Editing by Greg Mahlich)